Crude oil price volatility has been analyzed extensively for organized spot, forward and
futures markets for well over a decade, and is crucial for forecasting volatility and Value-at-
Risk (VaR). There are four major benchmarks in the international oil market, namely West
Texas Intermediate (USA), Brent (North Sea), Dubai/Oman (Middle East), and Tapis (Asia-
Pacific), which are likely to be highly correlated. This paper analyses the volatility spillover
and asymmetric effects across and within the four markets, using three multivariate GARCH
models, namely the constant conditional correlation (CCC), vector ARMA-GARCH
(VARMA-GARCH) and vector ARMA-asymmetric GARCH (VARMA-AGARCH) models.
A rolling window approach is used to forecast the 1-day ahead conditional correlations. The
paper presents evidence of volatility spillovers and asymmetric effects on the conditional
variances for most pairs of series. In addition, the forecast conditional correlations between
pairs of crude oil returns have both positive and negative trends. Moreover, the optimal hedge
ratios and optimal portfolio weights of crude oil across different assets and market portfolios
are evaluated in order to provide important policy implications for risk management in crude
oil markets.
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